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Higher rates: ARMs making a comeback


Higher-rates

After reaching historic low figures, mortgage rates in the country have started to move upwards. In fact, this movement has been so prominent that the rates have reached highest figures in last 2 years. Given the sharp rise in the fixed rate mortgages (FRMs), home buyers are looking for lowest possible rates. This has raised the demand for adjustable rate mortgages (ARMs) vis-a-vis FRMs. According to the data published by the Mortgage Bankers Association (MBA), in the month of June, share of ARMs in all mortgage applications was 16%. In relative terms, this was the largest since 2008. Data further reveals that the share of ARMs in total mortgage applications has gone up by nearly 50% over the past 1 year.

Rate on FRM rose more than the rate on ARM

In case of FRMs, the rate remains fixed throughout the term of the loan. In other words, if you take out a fixed rate mortgage, you will have to make fixed monthly payment throughout the entire life of the loan. On the other hand, in case of an ARM, the rate varies with some benchmark index. However, initially for a certain fixed period of time, the rate remains fixed and once that period is over, the rate varies. The initial rate on an ARM is lower than the rate on a comparable FRM.

Since past few months, mortgage rates for all types of loans have been on a rising spree. But, the rates have increased more rapidly in case of ARMs than the rate of increase in FRMs. The relatively slow increase in the rate on ARMs has led to renewed demand for ARMs vis-a-vis FRMs. Since May, on an average, rate on 30-year FRMs has increased by more than 1%, whereas the initial rate on 5-year ARM, on an average, has increased by 60% of a percentage point. This comparatively slow rise in the rate on ARMs in relation to the rise in the rate on FRMs has led to higher demand for ARMs.

Are ARMs better choice than FRMs?

Many home buyers prefer the security and certainty offered by an FRM over an ARM. Certainty of making fixed monthly payments throughout the entire loan term, make FRM a preferable choice for many home buyers. But, it may not always be the best choice. Many experts are of the opinion that ARMs are better choice than the FRMs for many home buyers. For the home buyers, who do not stay in a house for a long time, ARM is definitely a better choice. According to a leading mortgage expert, on an average, people move every 7 to 10 years. For them ARM is a better option. If these home buyers go for an FRM, it means that they are paying for security that they are not actually using.

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